Liberal candidate Chrystia Freeland defeated NDP rival Linda McQuaig, with Freeland winning with 49.1 per cent of the votes to McQuaig's 36.4 per cent according to Elections Canada. Conservative candidate Geoff Pollock was a distant third with just 8.7 per cent of the vote.
Widely seen as a litmus test of which party would prevail as the best alternative to the governing Conservatives, both the Liberals and NDP poured their resources into the campaign, with both Liberal leader Justin Trudeau and NDP Leader Tom Mulcair making appearances on the hustings.
Freeland credited Trudeau's numerous appearances as "hugely important" to her win.
"The results tonight in Toronto Centre and across the country show that the Liberal party is the alternative to the Conservative party," she said following her victory speech late Monday.
"They show that Justin is going to be the leader who forms the next federal government. He has done a terrific job and I'm so excited about the work that we're doing together — all of us together."
The upbeat mood of the assembled crowd of loyal NDP supporters didn't dampen too much when McQuaig gave her concession speech, with a loud cheer breaking out when she called the byelection a "trial run" for the national contest in 2015.
They always knew it would be an uphill battle, given that the riding is a Liberal stronghold, she said. But the NDP did better in Monday's byelection than when the so-called "Orange Crush" was happening.
"I think it's a substantial victory for us that we've done better in this election and this riding than we've ever done before," she added.
McQuaig said it was too early for her to talk about running in 2015, but wouldn't rule it out.
"The real point is what happens in 2015," she said. "So consider this just a trial run for the real thing in 2015."
The riding, a melange of low-income residents and the very wealthy, was freed up when former Liberal interim leader Bob Rae resigned.
In some ways, it's a microcosm of urban Canadian society, said former Liberal cabinet minister Bill Graham, who held the riding for years.
Income inequality has been a big theme in the race, with both Freeland and McQuaig having tackled the topic in their writings.
The New Democrats were hoping to beat the Liberals in the riding they've held for two decades and where the Liberals would have suffered a serious setback to their comeback plan.
It was one of four seats up for grabs in Ontario, Quebec and Manitoba.
Freeland — whose impressive resume includes degrees at both Harvard and Oxford, editor at Thomson Reuters and award-winning author — said the byelections were the first act ahead of the 2015 general election.
On the homefront, Freeland said housing and transit are huge issues in her new riding, as well as an agenda to grow the economy.
Both parties ran aggressive campaigns, with McQuaig painting her rival as a tourist who has lived outside the country for a decade — something that haunted former Liberal leader Michael Ignatieff. McQuaig, who's lived in the riding for years, says Freeland doesn't have a clue what issues face residents in the riding. McQuaig has lived in Toronto Centre for years.
Meanwhile, Freeland has accused McQuaig of dividing the riding into two groups: long-time residents versus newcomers, with immigrants at the "back of the bus" when it came to political rights.
Freeland went on the attack in her victory speech, saying the nasty campaign showed that the NDP, like the Conservatives, fight dirty.
"They've decided that the way you win is by being negative through negative personal attacks," she said. "It had nothing to do with what actual Canadians with what the actual people of Toronto Centre need and want."
The Liberals stayed positive, she said, showing what kind of politics they practice. "And you know what? We won."
In the 2011 election, the Liberals won Toronto-Centre with 41 per cent of the votes to 30 per cent for the NDP.
Voter turnout on Monday was 38 per cent.
— with files from Will Campbell in Toronto.